via Mounting debts collapsed Essars deal – The Zimbabwe Independent July 10, 2015 by Kudzai Kuwaza/Elias Mambo
THE Essar-Zimsteel deal that was expected to breathe life into the comatose economy broke down due to government’s constant revision of the costs involved in reviving the project, and also the ballooning debt overhang.
In March 2011 government signed a US$750 million deal with Indian firm, Essar Africa Holdings, amid much pomp and fanfare in which the foreign investor agreed to take over and resume operations at the now defunct state-owned Ziscosteel.The steelmaker was once part of the pillars of the economy before it was rundown through mismanagement and corruption.
Informed sources this week said Essar balked at the costs involved in reviving the project which include US$150 million for the relining of the blast furnace and rolling mills, and US$300 million for replacement of oxygen tanks at the ruined steelmaking giant.
Essar was also expected to repay a debt of more than US$180 million to German bank Kreditanstalt Fur Wiederaufbau (KfW) accrued by Ziscosteel to fund its operations.
Ziscosteel borrowed the money from the bank and other commercial institutions against its exports, but has since failed to repay the loan dating back to 1998, sources revealed.
The collapsed deal, insiders added, was also bogged down by government’s US$50 million debt to one of China’s largest steel companies, Shougang Corporation, for the upgrade of Ziscosteel blast furnace four which was completed in 1998.
Essar was also still to pay for iron ore claims, which had been transferred to them, saddling the company with a huge financial burden.
Adding to all the debts are local liabilities of US$300 million. The liabilities include workers who have gone for years without being paid.
“These costs for Essar were even more burdensome as the company had downscaled its planned investment from US$750 million to US$450 million,”a source said.
The source also said Essar had indicated that they could only absorb 2 400 of the 3 500-strong workforce at Ziscosteel.
“Essar had also indicated that of the 2 400 workers they would absorb in the new project, the Indian based firm would only employ 1 100 workers during the resuscitation period,” said another government source.
In an interview with the Zimbabwe Independent last month, Mines and Mining Development minister Walter Chidhakwa said government had held several meetings with Essar during which all obstacles obstructing the implementation of the deal were removed.
He said it was then up to Essar to start operating after paying the required mining fees of US$400 000.
Chidhakwa told the Independent: “The first thing is that the Essar deal has been embraced by government and cabinet has actually set up an (inter-ministerial) committee that is responsible for the implementation of the project, recognising obviously that we previously had a steel plant and now we don’t have.
“We need to have a steel plant if we are going to get ourselves involved in infrastructure development. We cannot do so on the basis of imported steel. We need a steel plant and the Essar deal offers us the opportunity to regain our status as one of the few countries in Africa that produce steel.”
The deal has been in limbo for a long time as some groupings such as the Black empowerment lobby group, Affirmative Action Group (AAG) wanted government to reverse the acquisition of Redcliff steelmaker by Essar, arguing the economy would not accrue any significant benefits from the deal in its current structure.
Recently war veterans minister Christopher Mutsvangwa all but sounded the death knell of the deal when he said the project was “a former Vice-President Joice Mujuru project” which would strip the country of its vital resources.
Addressing hundreds of war veterans in Kwekwe, Mutsvangwa alleged ousted Mujuru and her allies now being labelled “ the gamatox faction”, worked with the MDC formations to bring in Essar in a bid to rob the country of its natural resources.“Those Essar deals were part of Mujuru’s grand plan to give away our resources for free,” he alleged.
Development economist Maxwell Saungweme said the debt overhang for both the country and state-owned enterprises is a cause for worry in as far as boosting investor confidence is concerned.
“This is the tragedy within the country at large. As a nation we have a debt overhang of over US$10 billion, and most companies including quasi-government firms have huge debts,” said Saungweme.
“It is simple; if you have a huge debt overhang it is very hard to convince any potential investor that you are able to pay back.
“Also due to the high political and economic risks in Zimbabwe, government guarantees of any sort are not worth the paper they are written on. No investor can bank on a Zimbabwe government guarantee.
“So we are in a debt trap and no serious investor can have confidence in Zimbabwe at the moment.”
Economist John Robertson said the Zimbabwean government frustrated the Indian investors by shifting goalposts each time they met.
“The government was changing rules with each meeting with the Indian investors,” Robertson said. “The debt issue was not part of the original deal, the Indians were told at a later stage that they had to pay the debt and this did not go down well with them,” he said adding: “There is the issue of iron deposits which Essar wanted to export only to be told that they should also pay for them.”
Robertson said Essar was also discouraged by the international prices of exporting iron ore which have dropped, hence little profit expected in the business.